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Liquidity, innovation and growth

  • Berentsen, Aleksander
  • Rojas Breu, Mariana
  • Shi, Shouyong

Many countries simultaneously suffer from high inflation, low growth and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation on welfare, growth and the size of the financial sector. A novel feature is that the innovation sector is decentralized. Financial intermediaries arise endogenously to provide liquidity to this sector. Consistent with the data but in contrast to previous work, reducing inflation generates large growth gains. These large gains cannot be easily reproduced by imposing a cash-in-advance constraint in the innovation sector.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 8 ()
Pages: 721-737

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Handle: RePEc:eee:moneco:v:59:y:2012:i:8:p:721-737
DOI: 10.1016/j.jmoneco.2012.10.005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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